Question

In the economy of Cape Despair the subsistence real wage rate is​ $15 an hour. Whenever real GDP per hour rises above​ $15, the population​ grows, and whenever real GDP per hour of labor falls below this​ level, the population falls. The table shows Cape Despair's production function:

Labor (billions of hours per year) Real GDP (billions of 2000 dollars)
0.5 8
1.0 15
1.5 21
2.0 26
2.5 30
3.0 33
3.5 35

Initally, the population of Cape Despair is constant and real GDP per hour of labor is at the subsistence level of $15. Then a technological advance shifts the production function upward by 50 percent at each level of labor.

a. What are the initial levels of real GDP and labor productivity?
b. What happens to labor productivity immediately following the technological advance?
c. What happens to the population growth rate following the technological advance?
d. What are the eventual levels of real GDP and real GDP per hour of labor?

Answer 1

Answer:

new levels of real after 50% increase in gdp =

0.5 ----> 8(1+0.5) = 12 labour productivity = 12/0.5 = 25

1-----> 22.5 22.5/1 =22.5

1.5 21(1+0.5) = 31.5 31.5/1.5 = 21

2.0 26(1+0.5) = 39 39/2 = 19.5

2.5 30 = 45 45/2.5 = 18

3.0 33 = 49.5 49.5/3 = 16.5

3.5 35 = 52.5 52.5/3.5 =15

Explanation: